1. Metrics for Success in Real Estate Investing
Metric - a standard for measuring or evaluating something
You Get What You Measure
Thomas Winfield
May 14, 2016

2. This is not a solicitation or offer
Nothing in this presentation is meant to be Legal, Tax or Financial advice
Consult your Lawyer for legal advice
Consult your Tax Advisor for Tax advice
Consult your Financial Advisor for Financial advice

3. Discussion Points Economy Market What’s it Worth to Ya’
Case Study Outline
Economy
Market
What’s it Worth to Ya’
Acquisition Metrics
Ownership Metrics
Disposition Metrics

4. Case- Searching for a Good Deal
Investor Can Qualify for a Purchase of $500,000
Invest $2000/Unit to Bring up to Pro Forma Rents
Non-Owner Occupied
Sale/Trade After 5 Years
No Accounting for Income Taxes
No Accounting for Cost at Sell of Property
Objective
5% Return on Initial Equity
10% Internal Rate of Return

5. Example Properties Property A Property B Property C Location
Long Beach
Desert Hot Springs
Palmdale
Price
$500,000
No. Units 4 8 5
Building Size (SF)
2080
4000
3912
Lot Size (SF)
6220
8816
7462
Year Built
1985
1980
1983
Gross Scheduled Income
$40,320
$48,600
$50,100
Net Operating Income (NOI)
$21,870
$24,300
$31,262
Pro Forma GSI
$44,400
$60,000
$57,600

6. Economy
Interest Rates
Jobs
Inflation

7. Economy-Interest Rates
Loaning Money to the US Government is the Safest Investment in the World
The 10 year Treasury Note is a Good Benchmark for Intermediate Term Investments

8. Economy- Jobs

9. Economy-Inflation Rate

10. Economy-Where Else Should I Invest?

11. Market/Submarket
You can Fix the Property, You Can’t Fix the Neighborhood

12. Real Estate Market Cycle
Is the Market Recovering or Expanding?
Rents Increasing
Vacancy Rates Decreasing
Each Market has it’s Own Real Estate Cycle

13. Market/Submarket--Income
Long Beach
Desert Hot Springs
Palmdale
California US
Income Per Capita
$26,866
$14,757
$18,695
$29,634
$28,051
Median Household Income
$52,900
$32,883
$54,277
$61,632
$53,046

14. Market Evaluation Ranking
Property A
Property B
Property C
Location
Long Beach
Desert Hot Springs
Palmdale
Market Rank 1 3 2
Price
$500,000
No. Units 4 8 5
Building Size (SF)
2080
4000
3912
Lot Size (SF)
6220
8816
7462
Gross Scheduled Income
$40,320
$48,600
$50,100

15. What is an Investment Worth?
Investment value (to a particular investor) is different from market (appraisal) value.
Real estate decisions are made with an investment motive: expecting cash flows from the investment
The Present Value of the Projected Future Cash Flow
The Quality of the Cash Flow
The Risk Premium Associate with the Asset

16. Time Value of Money
The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

17. Time Value of Money– Future Value
If I give you $100 today, how much will you give me a year from now?
Compute Future Value:
Assume $100 invested for (period of) 1 Year at 5% interest
FV=$100*(1.05)= $105

18. Time Value of Money – Present Value
If you give me $105 in a year, how much should I give you now?
Compute Present Value:
Assume $105 discounted for 1 Year at 5% interest
PV = FV/(1+i)**n
PV=$105/(1.05)= $100

19. Things to Check Before You Buy
Acquisition Metrics
Things to Check Before You Buy

20. Annual Property Operating Data (APOD)
APOD: Form outlining the Income and Expenses associated with a property. This allows an investor to perform basic calculations.
Gross Scheduled Income (Sum of rents when all units are rented) - Vacancy Rate (cost/percent of units not currently rented) =Effective Rental Income - Expenses (Sum of all expenses other than income taxes) = Net Operating Income (NOI) -Debt Service (Payments on the borrowed money) = Cash Flow Before Taxes

21. Gross Rent Multiplier Ease of Calculation Easy to Verify
Definition: A gross rent multiplier is a rough measure of the value of an investment property that is obtained by dividing the property's sale price by its gross annual rental income.
Ease of Calculation
Easy to Verify
Does not include Vacancies
Does not include Expenses
Property
Long Beach
Desert Hot Springs
Palmdale
Gross Rent
$40,320
$48,600
$50,100
Property GRM
12.4
10.3
9.9
Market Median
12.9
7.1
10.7
Price Based on Market GRM
$520,128
$345,060
$536,070

22. Size Metrics Long Beach Desert Hot Springs Palmdale Number of Units 48 5
Price/Unit
$125,000
$62,500
$100,000
Average Unit Size
520
783
500
Price/SF
$240
$125
$128
Median Price/SF
$248
$89
$114
Rent/SF
$19.38
$12.15
$12.80
Median Rent/SF
$18.24
$10.00
$12.07

23. Debt Service Coverage Ratio
The DSCR or debt service coverage ratio is the relationship of a property's annual net operating income (NOI) to its annual mortgage debt service (principal and interest payments).
DSCR= NOI/Annual Debt Service

24. How Much Can I Borrow? Compute Annual Payment base on DSCR
Compute Max Loan using Present Value formula with the computed Annual Debt Service
Long Beach
Desert Hot Springs
Palmdale
NOI
$24,998
$24,300
$31,262
Debt Service
$24,157
DSCR
1.03
1.01
1.29
Amount Needed
$325,000
Max Amt Borrow
$310,345
$301,776
$386,348

25. Cap Rate Definition
The capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate.
Used to estimate the investor's potential return on his or her investment.
If I paid cash for the property, then the cap rate would be the return on my investment

26. Historical Cap Rates for Property Class
Class A- Built within the past 10 years or so; good quality renters with good jobs; very little maintenance / repair issues
5% to 7%
Class B- Built within the past 20 years or so; tenants mix of white and blue collar and has some deferred maintenance / repairs.
7% to 9%
Class C- Built within past 30 years or so; tenants mix of mainly blue collar workers & subsidized housing and has maintenance / repairs.
10% to 12%
Class D- Built 30 years plus, usually found in bad areas filled with bad tenants. If properties are in a Class B or Class C area, you may reposition to higher Cap Rate.
12% Plus

27. Cap Rate Measures Risk The Greater the Cap Rate, the Lower the Price
Cap Rate is a measure of risk

28. Comparing Cap Rates to Risk Free Investments
The Risk Premium is the difference between the Treasury Rate and the Cap Rate

29. Which Property Has the Best Cap Rate
Long Beach
Desert Hot Springs
Palmdale
Entry Cap Rate
5.0%
4.9%
6.2%
Pro Forma Cap Rate
5.5%
7.2%
6.9%
Market Median
5.9%
7.8%
7.6%
Price Based on Market Median
$423,695
$311,538
$411,342

30. Band of Investment (Derived Cap Rate)
The Band of Investment is a yield capitalization method that is used to build a capitalization rate using two components; financing and equity.
The formula is: Cap Rate = F + E.
(F)inancing = Mortgage (Loan) Constant x percent financed
(E)quity = Desired Return x percent down

31. Calculate Property Value Based on BOI Method
Desired Return of 5%
Down Payment of 25%
Loan Rate of 5%
Amount Borrowed $375,000
Loan/Mortgage Constant = Annual Payment/Loan Amount = $24,157/$375,000 =.064
F=Loan Constant*Percent Borrowed =.064*.75=.048 = 4.8%
E=Desired Returned*Percent Down payment =.05*.25=.0125=1.2%
Derived Cap Rate =F+E =4.8% + 1.2% =6%
If I want a certain return, how much should the cap rate be?
Long Beach
Desert Hots Springs
Palmdale
NOI
$24,998
$24,320
$31,262
Derived Cap Rate 6%
Value
$416,634
$405,333
$521,033

32. Break Even Analysis
Breakeven Occupancy Ratio is the Ratio of all expenses to Scheduled income
Indication of What is needed to make a profit
Long Beach
Desert Hot Springs
Palmdale
Operating Expenses
$14,112
$21,870
$16,834
Debt Service
$24,157
Gross Scheduled Income
$40,320
$48,600
$50,100
Breakeven Ratio Initial
95%
82%
Pro Forma Breakeven
89%
75%
77%

33. Operating Expense Ratio
The operating expense ratio formula measures how much of a property’s potential rental income is consumed by expenses needed to operate the property.
Operating Expense Ratio =
Operating Expenses
Gross Scheduled Income
Long Beach
Desert Hot Springs
Palmdale
Operating Expenses
$14,112
$21,870
$16,834
Gross Scheduled Income
$40,320
$48,600
$50,100
Operating Expense Ratio
35%
45%
34%

34. Year 1 Cash Flow Comparison
Long Beach
Desert Hot Springs
Palmdale
GROSS SCHEDULED INCOME
$40,320
$48,600
$50,100
Less: Vacancy & Cr. Losses
$1,210
$2,430
$2,004
EFFECTIVE RENTAL INCOME
$39,110
$46,170
$48,096
Less: Total Operating Expenses
$14,112
$21,870
$16,834
NET OPERATING INCOME
$24,998
$24,300
$31,262
Less: Annual Debt Service
$24,157
CASH FLOW BEFORE TAXES
$841
$143
$7,105

35. Return on Invested Capital (ROIC)
Down Payment
Invested Capital
Loan Fees
Closing Cost
Rehab Cost
Etc.
Return on Invested Capital (ROIC) =
Year 1 Cash Flow
Total Invested Capital
Long Beach
Desert Hot Springs
Palmdale
Invested Capital
$148,000
$159,750
$153,750
Year 1 Cash Flow
$841
$143
$7,105
ROIC
0.5%
0.1%
4.6%

36. Return on Equity (CF/Equity)
Equity is Down Payment plus Debt Reduction
Long Beach
Desert Hot Springs
Palmdale
Year 1 Cash Flow
$841
$143
$7,105
Equity
$130,533
ROE
0.6%
0.1%
5.4%

37. Ownership Metrics
What Metrics are Useful During Property Ownership?

38. Yearly Cash Flow Assumptions:
Year 1: Repairs made to achieve Pro Forma Rents
Increase Rents by 3% yearly
Expense are 35% of Gross Scheduled Income
Year 1
Year 2
Year 3
Year 4
Year 5
Long Beach
$841
$3,371
$4,197
$5,047
$5,924
Desert Hot Springs
$143
$11,843
$12,923
$14,035
$15,181
Palmdale
$7,105
$10,979
$12,033
$13,119
$14,237

39. Discounted Cash Flow (DCF)
DCF analysis uses future cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment.
You are buying cash flow, not property
The higher the risk, the greater the discount rate

40. Net Present Value (NPV)
The Net Present Value (NPV) benefit is a calculation that measures the net benefit of a project in today’s dollar terms, taking into account that over time money today is more valuable than money in the future (discounted time value of money).
Decision rule: if NPV > 0, then the project meets desired returns

41. Net Present Value Based on Cash Flow and Desired 10% Return
My Desired Return is 10%
Year 5 Returns Include Proceeds from Sale of Property
Cost
Year 1
Year 2
Year 3
Year 4
Year 5
NPV
Long Beach
-$148,000
$841
$3,371
$4,197
$5,047
$242,374
$11,497
DHS
-$159,750
$143
$11,843
$12,923
$14,035
$346,129
$76,711
Palmdale
-$153,750
$7,105
$10,979
$12,033
$13,119
$328,977
$76,412
if NPV > 0, then the project meets desired returns

42. Internal Rate of Return (IRR)
IRR gives an investor the means to compare alternative investments based on their yield.
Cost
Year 1
Year 2
Year 3
Year 4
Year 5
IRR Leveraged
IRR Unleveraged
Long Beach
-$148,000
$841
$3,371
$4,197
$5,047
$242,374
12% 7%
DHS
-$159,750
$143
$11,843
$12,923
$14,035
$346,129
20%
11%
Palmdale
-$153,750
$7,105
$10,979
$12,033
$13,119
$328,977
21%

43. What Happens When The Property Must Be Sold or Exchanged?
Sale or Exchange
What Happens When The Property Must Be Sold or Exchanged?

44. Exit Cap Rate-The Projected Cap Rate at Point of Sale
Historical Analysis
Economic Trends
Class A: 5% to 7%
Class B: 7% to 9%
Class C: 10% to 12%
Class D: 12% Plus
How do I know what the Cap Rate should Be?

45. Calculate Sale Price Calculate Value based on 3% Yearly increase
Long Beach
Palmdale and DHS
Calculate Value based on 3% Yearly increase
Calculate Value Based on Exit Cap Rate and NOI
Long Beach
Desert Hot Springs
Palmdale
Purchase Price
$500,000
NOI
$40,518
$39,546
Cap Rate 6%
Annual Increase 3%
Sale Price
$580,808
$675,305
$659,097

46. Total Return
How much Money Will I have Received Compared to How much I Invested?
Total Invested
Year 1
Year 2
Year 3
Year 4
Year 5
Total
Received
Return
Long Beach
-$148,000
$841
$3,371
$4,197
$5,047
$242,374
$255,831
173%
DHS
-$159,750
$143
$11,843
$12,923
$14,035
$346,129
$385,073
241%
Palmdale
-$153,750
$7,105
$10,979
$12,033
$13,119
$328,977
$372,214
242%

47. Long Beach Desert Hot Springs Palmdale Market 1 3 2 GRM 12.4 10.3 10.0
Price/Unit
$125,000
$62,500
$100,000
Price/SF
$240
$125
$128
Rent/SF
$19.38
$12.15
12.80
Cap Rate
5.0%
4.9%
6.2%
Value using BOI Cap
$416,634
$405,333
$521,033
Amount Financeable
$310,345
$301,776
$386,348
Break Even
95%
82%
Cash Flow Year 1
$841
$143
$7,105
Cash Flow Year 5
$5,924
$15,181
$14,237
Cash on Cash (ROIC)
0.5%
0.1%
4.6%
NPV
$11,497
$76,711
$76,412
IRR
12%
20%
21%
Total Return
173%
241%
242%
Sales Price
$580,808
$675,305
$659,097

48. References http://www.propertymetrics.com/
What Every Real Estate Investor Needs To Know About Cash Flow ...and 36 Other Key Financial Measures– Frank Gallinelli